OECD leading indices for March released today confirm an incipient slowdown in global growth but monetary trends suggest limited weakness while hinting at a momentum trough in the late summer.
As previously discussed, the approach to forecasting the global cycle employed here relies on two key inputs – six-month growth in global real narrow money and a leading indicator derived from the OECD’s country leading indices. Real money typically leads industrial output by about six months with the leading indicator moving about three months later (i.e. three months ahead of output).
Real money growth peaked in November 2011 and fell sharply through February 2012, suggesting a slowdown in output momentum from a May top, allowing for the usual six-month lead. This prospect has now been confirmed by a February peak in the leading indicator, with the March decline the first since June 2011 – see chart. (Note that the indicator is based on a proprietary transformation of the raw data so cannot be inferred directly from the OECD release.)
Turning points in the leading indicator usually signal the start of a multi-month trend. Six-month real money expansion, however, recovered marginally in March, hinting that February may have marked a trough. If so, output momentum may bottom in August, with the leading indicator reaching a low in May (applying the respective six- and three-month leads).
The risk, of course, is that real money resumes a slowdown after temporarily stabilising in March / April. Recent policy easing in Europe, Japan and some emerging economies should be supportive but could be offset by an “endogenous” tightening of financial conditions if the Eurocrisis escalates. With real money currently still expanding respectably by historical standards, however, the provisional message is that the coming economic slowdown will be modest and possibly short-lived.